The Commissioner Of Income Tax,Faridabad v. Bir Singh (Huf), Ballabgarh

Income-Tax Appeal No. 209 of 2004 1 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH. --- Income-Tax Appeal No. 209 of 2004Date of Decision: 27.10.2010 The Commissioner of Income Tax,Faridabad --- Appellant Versus Bir Singh (HUF), Ballabgarh --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL. --- PRESENT:Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant-Revenue. None for the respondent. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-tax Act,1961 (for short “the Act’”) has been filed by the Revenue against theorder dated 19.1.2004, passed by the Income Tax Appellate Tribunal,Bench ‘SMC-1’, Delhi (in short “the Tribunal”) in Income-tax AppealNo. 452/Del/2001, relating to assessment year 1997-98, claiming thefollowing substantial questions of law for determination by this Court: 1-Whether the Hon’ble ITAT was justified in applying the ratio, laid down in the case of CIT Vs. HindustanHousing & Land Development Trust Limited to thepresent case even after insertion of Section 45(5) in Income-Tax Appeal No. 209 of 2004 2 the Income Tax Act specifically for charging ofenhanced compensation in the year of receipt? 2- Whether the Hon’ble ITAT was justified in holdingthat neither additional compensation nor interestaccrued or received thereon can be taxed unless itattains finality from the High Court in spite of thefact that the additional compensation as well as theinterest has actually been received by theassessee? 2. Briefly stated the facts of the case necessary foradjudication as narrated in the appeal are that the respondent-assessee received some amount of enhanced compensation inrespect of the land acquired under the Land Acquisition Act, 1894 (forshort “the 1894 Act”). It was claimed that the said amount and theinterest accrued thereon were not taxable as the amount so receivedwas not final and was still in dispute, and the same had been orderedto be paid on furnishing a security. The plea of the assessee was notaccepted by the assessing officer on the ground that the amount bywhich the quantum of compensation was enhanced or would beenhanced in future by the court shall be deemed to be the income,chargeable under the head ‘capital gains’ of the previous year inwhich such amount was received. 3.The assessee filed appeal before the Commissioner ofIncome Tax (Appeals), [hereinafter referred to as “CIT(A)”]. The CIT(A) directed that the income from capital gains and the interestreceived by the assessee be charged in the year of receipt and the percentage of capital gains arising out of payment, covered by thesecurity should not be treated as income for the year but theremaining amount which was not covered by the security should betreated as income for the year and charged to tax under the head‘capital gains’. The CIT(A) further directed that deductions underSections 54B and 54F of the Act be allowed from the date of actualreceipt of the enhanced amount of compensation. The Revenue filedappeal against the order of the CIT(A) before the Tribunal which wasdismissed by order dated 19.1.2004. 4.This is how the Revenue is again in appeal before thisCourt. 5. We have heard learned counsel for the appellant andperused the record. 6. Learned counsel for the appellant-Revenue submittedthat the enhanced compensation that was received by the assesseewas taxable in the year of receipt. Learned counsel further submittedthat any interest which had been paid to the assessee on account ofdelayed payment was also taxable in the hands of the assesseeunder the head ‘income from other sources’ in the year of receipt.The counsel, thus, urged that the Tribunal had erred in affirming theorder of the CIT(A). In support of her submissions, learned counselreferred to the judgment of the Supreme Court in Commissioner of 4.This is how the Revenue is again in appeal before thisCourt. 5. We have heard learned counsel for the appellant andperused the record. 6. Learned counsel for the appellant-Revenue submittedthat the enhanced compensation that was received by the assesseewas taxable in the year of receipt. Learned counsel further submittedthat any interest which had been paid to the assessee on account ofdelayed payment was also taxable in the hands of the assesseeunder the head ‘income from other sources’ in the year of receipt.The counsel, thus, urged that the Tribunal had erred in affirming theorder of the CIT(A). In support of her submissions, learned counselreferred to the judgment of the Supreme Court in Commissioner of Income-tax v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC). 7-In so far as the question of receipt of enhancedcompensation is concerned, the same stands concluded in favour of Income-Tax Appeal No. 209 of 2004 4 the Revenue by the decision of the apex Court in Ghanshyam(HUF)’s case (supra). 8. Section 45(5) of the Act was inserted by the Finance Act,1987 w.e.f. 1.4.1988. According to it, under clause (b) thereof, theenhanced compensation shall be chargeable under the head “capitalgains of the previous year” in which such amount is received by theassessee. 9. This came for consideration before the Apex Court in Ghansham’s case (supra) on which reliance has been placed by theRevenue. In that case, the Hon’ble Supreme Court was dealing withthe issue relating to assessability of capital gains to income tax underthe provisions of Section 45(5) of the Act. Section 45 was amendedby the Finance Act, 1987, w.e.f. 1.4.1988, whereby sub-section (5)was inserted as an overriding provision. It was held that theenhanced compensation under the 1894 Act arises and is payable atmultiple stages and, therefore, compensation is treated as “deemedincome” at the time when it is received and taxed on receipt basis.This is notwithstanding the cases where enhanced compensationmay be in dispute in pending appeal and claimant had beenpermitted to withdraw the amount conditionally. It was further heldthat interest on enhanced value of the land which forms part ofcompensation is exigible to tax in the year of receipt. However, it wasobserved that interest on account of delayed payment of enhancedcompensation is also income but its nature is different. The saidjudgment while interpreting Section 45(5)(b) of the Act dealt with the Income-Tax Appeal No. 209 of 2004 5 taxability of enhanced compensation and interest under the 1894 Actwhich partakes the character of compensation alone. 10.The question that now remains for consideration in thisappeal is, whether the interest on enhanced compensation receivedby the assessee is exigible to tax in the year of receipt or at the timewhen the lis regarding compensation for the acquired land attainsfinality. 11.The issue requires answer to the following points: (a)the scope of term ‘income’ under the Act; (b)whether interest on enhanced compensationis income which accrues or arises duringpendency of appeal by the State andpendency of litigation regarding determinationof final compensation has any effect thereon?is income which accrues or arises duringpendency of appeal by the State andpendency of litigation regarding determinationof final compensation has any effect thereon? 12. Delving on the first issue, for its answer, variousprovisions of the Statute requires examination. 11.The issue requires answer to the following points: (a)the scope of term ‘income’ under the Act; (b)whether interest on enhanced compensationis income which accrues or arises duringpendency of appeal by the State andpendency of litigation regarding determinationof final compensation has any effect thereon?is income which accrues or arises duringpendency of appeal by the State andpendency of litigation regarding determinationof final compensation has any effect thereon? 12. Delving on the first issue, for its answer, variousprovisions of the Statute requires examination. 13.Section 2(24) of the Act gives an inclusive definition of“income” which is to be construed in the widest term. It adds severalartificial categories to the concept of “income”. Anything which canproperly be described as “income” is taxable under the Act unlessexpressly exempted. Even if a receipt did not fall within the ambit ofany of those clauses enumerated therein, it still would be “income” ifit partakes the character of “income”. 14.Section 4 of the Act is the charging provision. What islevied by virtue of provisions of Section 4 is income tax alone. This section brings to charge the total income of the previous year ofevery person. In order to constitute income, the receipt must comeas a return from a definite source which is of the character of incomeaccording to the ordinary meaning of that word. Section 4 of the Actpostulates that: (a)Annual Finance Act shall prescribe the rate or rates forthe year at which income tax is to be charged;the year at which income tax is to be charged; (b)the charge of income tax is on every person specified asassessable entities in Section 2(31);assessable entities in Section 2(31); (c) the income is that of the previous year; and (d) the levy is on the total income of the assessable entitycomputed in accordance with and subject to theprovisions of the Act.computed in accordance with and subject to theprovisions of the Act. 15. Section 5 describes “scope of total income”. According to it, income that accrues or arises or is received or is deemed toaccrue or arises or is received during any previous year alone is tobe taken note of. A receipt must come in the character of income orprofit in respect of a transaction. The Act draws a distinction betweenincome accruing or arising and income received. The accrual orarising of income has nothing to do with the actual receipt. 16. From a plain reading of aforesaid statutory provisions, itemerges that the expressions “accrued” or “arisen” or “received” or“deemed to be received” used in the Act must be given their plainmeaning in the absence of any particular definition to fall within thescope of income. 17. Now, examining the exigibility of income tax to the amountreceived as interest on enhanced compensation, inevitably referencehas to be made to the method of accountancy followed by theassessee. 18. Income is assessed on the basis of either actual receipt ofinterest received on enhanced compensation during pendency ofappeal in higher court or on the basis of amount accrued during theyear. The former is called cash system whereas latter is termed asmercantile system. Under cash system, the income is exigible to taxonly on the basis of actual receipt irrespective of the fact, whether thesame had arisen or not whereas mercantile system envisagesaccrual or arising of income or deemed to accrue or arise during theyear in question. 17. Now, examining the exigibility of income tax to the amountreceived as interest on enhanced compensation, inevitably referencehas to be made to the method of accountancy followed by theassessee. 18. Income is assessed on the basis of either actual receipt ofinterest received on enhanced compensation during pendency ofappeal in higher court or on the basis of amount accrued during theyear. The former is called cash system whereas latter is termed asmercantile system. Under cash system, the income is exigible to taxonly on the basis of actual receipt irrespective of the fact, whether thesame had arisen or not whereas mercantile system envisagesaccrual or arising of income or deemed to accrue or arise during theyear in question. 19. Section 145 of the Act provides for method of accountancybeing followed by an assessee. The income arises either on receiptbasis or on accrual basis and income is deemed to accrue or arise toa person without its actual accrual or receipt. Under the aforesaidprovision, the income chargeable under the head “profit and gains ofbusiness or profession” and “income from other sources” is to becomputed in accordance with the method of accountancy regularlyemployed by the assessee. Where an assessee- landholder is notmaintaining any particular system of accountancy, the assessingofficer shall be justified to proceed on the basis that the assessee isadopting cash system of accountancy only and the interest receivedon enhanced compensation shall be liable to be assessed to incometax when it is actually received by the assessee. 20. It would now be appropriate to advert to the decision ofthe apex Court in Commissioner of Income Tax vs. HindustanHousing and Development Trust (1986) 161 ITR 524 on the basis ofwhich, the Tribunal had adjudicated against the Revenue. That was acase relating to a limited company which was maintaining itsaccounts on mercantile system. The land of the assessee companyhad been acquired and the arbitrator had made his award on 29.7.55granting compensation to the assessee. However, the same wasdisputed by the State in the appeal where the company waspermitted to withdraw the amount deposited by the StateGovernment on furnishing bond for refunding the amount in the eventof appeal being allowed, treating the dispute to be real andsubstantial. The apex Court held that in such a situation no absoluteright to receive the compensation at that stage had accrued to theassessee and, therefore, extra amount of compensation of Rs.7,24,914/- was not income accruing or arising to the assessee. Theassessee had been following mercantile system and in those facts,the Hon’ble Supreme Court held it not to be an accrual or arising ofincome. 21. The second issue cannot be effectively answered withoutascertaining the nature of the receipt of interest under the 1894 Act. 22.The interest to be paid under the 1894 Act falls under Sections28 and 34 of the said Act. Sections 28 and 34 of the Act read thus: “28. Collector may be directed to pay interest onexcess compensation. - If the sum which, in the opinionof the Court, the Collector ought to have awarded as Income-Tax Appeal No. 209 of 2004 9 compensation is in excess of the sum which the Collectordid not award as compensation, the award of the Courtmay direct that the Collector shall pay interest on suchexcess at the rate of nine per centum per annum from thedate on which he took possession of the land to the dateof payment of such excess into Court. 22.The interest to be paid under the 1894 Act falls under Sections28 and 34 of the said Act. Sections 28 and 34 of the Act read thus: “28. Collector may be directed to pay interest onexcess compensation. - If the sum which, in the opinionof the Court, the Collector ought to have awarded as Income-Tax Appeal No. 209 of 2004 9 compensation is in excess of the sum which the Collectordid not award as compensation, the award of the Courtmay direct that the Collector shall pay interest on suchexcess at the rate of nine per centum per annum from thedate on which he took possession of the land to the dateof payment of such excess into Court. Provided that the award of the Court may alsodirect that where such excess or any part thereof is paidinto Court after the date or expiry of a period of one yearfrom the date on which possession is taken, interest atthe rate of fifteen per centum per annum shall be payablefrom the date of expiry of the said period of one year onthe amount of such excess or part thereof which has notbeen paid into Court before the date of such expiry. 34. Payment of interest - When the amount of suchcompensation is not paid or deposited on or before takingpossession of the land, the Collector shall pay theamount awarded with interest thereon at the rate of nineper centum per annum from the time of so takingpossession until it shall have been so paid or deposited: Provided that if such compensation or any partthereof is not paid or deposited within a period of oneyear from the date on which possession is taken, interestat the rate of fifteen per centum per annum shall bepayable from the date or expiry of the said period of oneyear on the amount of compensation or part thereof Income-Tax Appeal No. 209 of 2004 10 which has not been paid or deposited before the date ofsuch expiry.” 23. Under the scheme of the 1894 Act, interest under Section34 is part of compensation while interest under Section 28 is not theinterest which partakes the character of compensation and is treateddifferently. The interest component on enhanced compensation underSection 28 is taxable under Section 56 of the Act as ‘income fromother sources’. 24.The apex Court in Ghanshyam (HUF)’s case (supra),considered this aspect as under: “…. The award of interest under Section 28 of the 1894Act is discretionary. Section 28 applies when the amountoriginally awarded has been paid or deposited and whenthe Court awards excess amount. In such cases intereston that excess alone is payable. Section 28 empowersthe Court to award interest on the excess amount ofcompensation awarded by it over the amount awarded bythe Collector. The compensation awarded by the Courtincludes the additional compensation awarded underSection 23(1-A) and the solatium under Section 23(2) ofthe said Act. This award of interest is not mandatory butis left to the discretion of the Court. Section 28 isapplicable only in respect of the excess amount which isdetermined by the Court after a reference under Section18 of the 1894 Act. Section 28 does not apply to cases ofundue delay in making award for compensation. See: Income-Tax Appeal No. 209 of 2004 11 Ram Chand and Ors. etc. v. Union of India and Ors.(1994) 1 SCC 44. In the case of Shree Vijay Cotton & OilMills Ltd,. vs. State of Gujarat (1991) 1 SC 262, this Courthas held that interest is different from compensation. 24. To sum up interest is different from compensation. Income-Tax Appeal No. 209 of 2004 11 Ram Chand and Ors. etc. v. Union of India and Ors.(1994) 1 SCC 44. In the case of Shree Vijay Cotton & OilMills Ltd,. vs. State of Gujarat (1991) 1 SC 262, this Courthas held that interest is different from compensation. 24. To sum up interest is different from compensation. However, interest paid on the excess amount underSection 28 of the 1894 Act depends upon a claim by theperson whose land is acquired whereas interest underSection 34 is for delay in making payment. This vitaldifference needs to be kept in mind in deciding thismatter. Interest under Section 28 is part of the amount ofcompensation whereas interest under Section 34 is onlyfor delay in making payment after the compensationamount is determined. Interest under Section 28 is a partof enhanced value of the land which is not the case in thematter of payment of interest under Section 34.” 25. The apex Court in the aforesaid decision has held thatinterest directed by the Collector is to be treated as part ofcompensation while the interest on the enhanced compensationdirected by the Court is not. Even though there is little confusion inreference to the relevant sections but as per discussion, it is clearthat interest directed by the Collector partakes the character ofcompensation and forms part thereof under Section 34 of the Actwhereas the interest ordered by the Court falls under Section 28 ofthe Act. Income-Tax Appeal No. 209 of 2004 12 (a)that ‘income from Business or profession’ and ‘incomefrom other sources’ are ascertained on the basis of system ofaccountancy followed by the assessee; (b)where assessee is not maintaining books of accounts byadopting any specific method, it shall be treated to be cash system ofaccountancy; (c)the interest under Section 34 to be awarded by theCollector partakes the character of compensation and is taxable inthe year of receipt in view of Section 45(5)(b) of the Act; and (d)under cash system of accountancy, the element ofinterest awarded by the Court received on enhanced amount ofcompensation under Section 28 of the 1894 Act falls for taxationunder Section 56 as ‘income from other sources’ in the year ofreceipt. 27. The interpretation aforesaid has the legislativeacceptance by way of incorporation of Section 145A(b) and 56(1)(viii)w.e.f. 1.4.2010 by Finance (No.2) Act, 2009 whereby now irrespectiveof system of accountancy being followed by the assessee, theinterest on enhanced compensation shall be taxable in the year ofreceipt. In view of the above, the questions of law are answeredaccordingly and the appeal is allowed. No costs. (AJAY KUMAR MITTAL)JUDGE Income-Tax Appeal No. 209 of 2004 13 October 27, 2010*rkmalik* (ADARSH KUMAR GOEL) JUDGE